January 30, 2011

The transition from Eric Schmidt to Larry Page as CEO of Google is a useful moment to take stock of this iconic company.

For years, book after book and article after article have praised Google as a citadel of innovation. They have lauded the incredible corporate culture where employees are treated like entrepreneurs. They have waxed lyrical about the staff’s freedom to spend 20 percent of their time on whatever they feel like going. It’s portrayed as a brilliantly innovative place with the brightest of the bright. New ideas are bubbling up all over. Writers have glowed with delight as they watched this wonder child become the star of the stock market.

The reality is somewhat different. The truth is that Google gets 95 percent of its revenues from a single core business—ads from searches. This is the result of a single insight—its page rank algorithm for searches—which became profitable when a way was found way to monetize the resulting traffic and provide advertisers exactly what they needed while keeping the ads discreet so as not to irritate users. The rest of Google’s scintillating idea factory has produced very little in comparison to the effort going into it. Gmail is popular but makes little money. Apart from Android, Google has produced a series of flops like Google Wave, Google Buzz, and Orkut.

The Google experience confirms a management fallacy that is still widespread: if you recruit the best people and give them the freedom to create, they will generate ideas and businesses that make money. The reality is that giving employees—even brilliant employees—freedom to do what they want results in guess what—in the employees doing what the employees want, not necessarily doing things that will necessary generate business and ideas for the company.

What all successful innovative businesses have is a tight focus on what would delight their clients. This is how a startup like Google got going in the first place: it had an an idea that continuously evolved to delight its customers.

Delighting customers is what big companies lose sight of when they focus on making money for shareholders and hierarchical bureaucracy sets in as they grow. They start tweaking their value chain and pursuing greater efficiency through economies of scale. When organic growth inevitably slows, they start acquiring other companies as the only way to grow. It’s a world of steadily declining returns.

That’s the world where Google now resides. It has become a large clanking, hierarchical bureaucracy, with a lot of bright people cooking up ideas that might be fun and interesting to them, but don’t for the most part generate successful businesses. It has started to fall into the pattern of the typical traditional business: it grows by acquiring other companies, like YouTube.

Large firms that continue to innovate, like Apple over the past decade, have found ways to go on delighting their clients. It’s a lot more than technical innovation. There are loads of firms in Silicon Valley that generate technical breakthroughs. What separates the innovation winners in business is not starting with an idea and then try to find someone who might buy it. They start at the other end and ask what might delight potential customers and then find ways to deliver that in successive waves of innovation that go on delighting those customers.

With the shift in the balance of power in the marketplace from seller to buyer, the customer is now the boss. Delighting the customer requires a from an inside-out to an outside-in focus. This is increasingly a requirement for survival.

Very valuable insights. You mention Google's model of reserving 20 % of working time for innovative activities. While this is a splendid idea it remains lifeless if these innovative activities are not results-oriented. Delighting customers is the right mantra, I agree.
In a recent consulting engagement as an interim manager I introduced the idea of "innovation labs" where team members could meet to discuss topics they thought important. I did not tell them how to proceed. All I was asking them was to present their results to the whole team and show how it benefits our customer. Not all innovation labs achieved this objective, those which did created a significant value for the customer. But even more important it helped team member focus on delighting customers. This by itself was worth the effort.

The reality is that giving employees—even brilliant employees—freedom to do what they want results in guess what—in the employees doing what the employees want, not necessarily doing things that will necessary generate business and ideas for the company.